Estate Planning & Tax Planning During the Coronavirus (COVID-19) Pandemic – A Canadian Tax Lawyer’s Guide

Introduction – COVID-19 & Your Estate, Your Inheritance, and Your Taxes

Ripping through the world’s population, the coronavirus (COVID-19) has, as of the end of April 2020, infected over 3 million people worldwide and resulted in over 200,000 deaths, almost 3,000 of them in Canada. As the COVID-19 pandemic continues, countries race to safeguard their citizens by enforcing social-distancing guidelines and invoking emergency-response legislation.

Unsurprisingly, the resulting turmoil has caused many Canadians to take a good, hard look at their estate plans. It has also caused some confusion for Canadians who anticipate an inheritance or who must administer an estate in the capacity of an estate trustee or executor.

This article discusses estate planning and tax planning during the COVID-19 pandemic.

 

COVID-19: A Reminder About the Importance of a Will & Power of Attorney

The COVID-19 pandemic serves as a stark reminder about the importance of a valid and current will. We briefly touch on three benefits of a valid and current will.

First, a valid will ensures that, when you die, your property goes to the intended beneficiaries. In the absence of a valid will, a deceased person’s property is distributed in accordance with succession law. For example, Ontario’s Succession Law Reform Act governs the distribution of the assets of a person who died intestate—that is, died without a valid will. Generally, intestacy law favours the deceased’s surviving spouse, who, if the deceased has no surviving descendants, inherits everything and, if the deceased has surviving descendants, inherits (a) a preferential share (currently set at $200,000) before any assets can be distributed to descendants and (b) 1/3 to 1/2 of the estate’s residue, depending on the number of the deceased’s surviving children. If the deceased has no surviving spouse or descendants, the deceased’s property will go, in order of priority, to (1) the deceased’s surviving parent or parents, (2) if no surviving parents, the deceased’s surviving brothers and sisters, (3) if no surviving brothers or sisters, the deceased’s surviving nephews and nieces, (4) if no surviving nephews or nieces, the deceased’s surviving next of kin, and (5) if no surviving next of kin, the Federal Crown. You might not want your assets distributed to one or more of these potential beneficiaries, and you will certainly want different allocations. You waive these decisions by opting against a will.

Second, a valid will allows you to plan for contingencies. Even if the distribution under intestacy law happens to suit you just fine, a valid will gives you a say on what happens, for instance, should you and a beneficiary die in circumstances making it impossible to determine who died first. In these circumstances, section 55 of Ontario’s Succession Law Reform Act deems each party to have survived the other. While this rule provides some certainty, it might result in redundant probate taxes and estate-administration costs for the first-to-die estate, which merely transmits property to the second-to-die estate. To guard against this problem, your will could include a survivorship clause requiring that, to inherit under your will, your beneficiary must survive for a clear period of time.

Third, a valid will gives you a means of implementing tax-planning opportunities and probate-planning opportunities, thereby preserving your estate’s assets for your beneficiaries. For example, your will could provide for the creation of tax-deferred spousal trust or it could contemplate a previously implemented estate freeze. Likewise, if you know that your trustee will likely need to obtain a probate certificate to distribute some of your assets but not others, you could separate these assets between two wills: a probate will and a non-probate will. This common strategy avoids probate tax on the value of the assets in the will that won’t be admitted to probate.

In light of the COVID-19 pandemic, one should also give serious thought to a power of attorney. If a serious illness renders you incapable of making financial or personal-care decisions, well-planned powers of attorney ensure that a trusted person can make these decisions on your behalf.

A power of attorney is a legal document giving someone else the authority to act on your behalf. The person who gives another this decision-making authority is called the grantor. The person empowered to make decisions on behalf of the granter is called the attorney.

Canada generally recognizes two sorts of powers of attorney relating to property or finances: (1) a general power of attorney and (2) a continuing or enduring power of attorney. Both versions authorize an attorney to manage your finances or your property on your behalf. But only a continuing power of attorney persists if you become mentally incapable of managing your own affairs.  Neither version of a power of attorney permits an attorney to do any of the following: (a) make your will; (b) change your existing will; (c) change a beneficiary under your life-insurance policy; (d) or grant a new power of attorney to another attorney on your behalf.

Ontario was one of the first Canadian jurisdictions to recognize a power of attorney for personal care. Many other Canadian jurisdictions have yet to recognize this form of a power of attorney. As its name suggests, a power of attorney for personal care authorizes the named attorney to make, on the grantor’s behalf, decisions concerning the grantor’s personal care if the grantor becomes incapable of doing so personally.

If you want to create or update your will so that your loved ones are taken care of, or if you want a power of attorney so that you are taken care of, consult with one of our experienced Canadian tax and estate lawyers today.

Ontario Emergency Order: Witnessing Wills and Powers of Attorney by Video Conference

Generally, a valid will and a valid power of attorney each require at least two witnesses. Under Ontario’s Succession Law Reform Act, a will is valid only if (1) the testator signs the will in the presence of at least two witnesses, who are present at the same time and (2) the two or more attesting witnesses sign the will in the presence of the testator. (This requirement doesn’t apply to a holograph will, which is a will that is wholly in the testator’s own handwriting.) Likewise, under Ontario’s Substitute Decisions Act, 1992, a power of attorney—whether a continuing power of attorney or a power of attorney for personal care—is valid only if the grantor has signed the power of attorney in the presence of two witnesses, and each witness signs the power of attorney as a witness.

These witness requirements obviously prove burdensome given social-distancing guidelines. So, on April 7, 2020, the Province of Ontario issued an emergency order that temporarily relaxes the requirements of witnessing a will or a power of attorney.

As a result of this emergency order, the witness requirements for a will and for a power of attorney may be satisfied by means of audio-visual communication technology, such as Zoom, if at least one of the witnesses is licensed in Ontario to practice law or provide legal services. The order defines “audio-visual communication technology” as “any electronic method of communication in which participants are able to see, hear and communicate with each other in real time.” In other words, a will may be validly executed if (1) the testator and the two witnesses each sign the same document by means of a live videoconference and (2) at least one of the witnesses is a licensed Ontario lawyer or a licensed Ontario paralegal. Similarly, a power of attorney may be validly executed if (1) the grantor and the two witnesses each sign the same document by means of a live videoconference and (2) at least one of the witnesses is a licensed Ontario lawyer or a licensed Ontario paralegal.

A few points are worth mentioning:

First, the emergency order doesn’t permit the use of electronic signatures. The will or the power of attorney must be physically signed in ink—i.e., a wet signature.

Second, the order hasn’t relaxed the requirement that all signatures appear on the same document. In other words, it doesn’t allow the testator, the first witness, and the second witness to each sign a copy of the will as counterparts. So, to validly execute the will or power of attorney, the parties might need to courier the document between them and attend successive videoconferences to witness each party’s signature.

Third, the order only applies to wills and powers of attorney in Ontario.

Fourth, the order isn’t retroactive, So, although Ontario declared a state of emergency on March 17, 2020, the order applies only to wills and powers of attorney executed on or after 5:15pm on April 7, 2020. This means that a will or power of attorney likely isn’t valid if it was witnessed by videoconference before April 7, 2020.

Finally, the order is effective only for the duration of the declared state of emergency relating to COVID-19.

To discuss your options for executing a valid will or power of attorney during this trying time, consult with one of our knowledgeable Canadian tax and estate lawyers.

A Time-Sensitive Tax-Planning Opportunity: Estate Freeze or Estate Re-Freeze

When a taxpayer dies, subsection 70(5) of Canada’s Income Tax Act deems that taxpayer to have sold each capital property at its fair market value immediately preceding the death. As a result of this subsection, a taxpayer will incur a taxable capital gain in the year of his or her death if appreciated capital assets were owned at the time of death.

An estate freeze is a transaction aimed at fixing or freezing an asset’s fair market value for tax purposes. In turn, the frozen fair market value allows the taxpayer to anticipate with reasonable certainty the tax liability from subsection 70(5). After the taxpayer implements the estate freeze, all future growth in the asset’s fair market value will accrue to other individuals or entities—usually, the taxpayer’s children or a family trust. Even more important, the estate freeze allows the taxpayer to defer the tax on the asset’s post-freeze growth. This tax liability is deferred until realized by the next generation.

Typically, an estate freeze unfolds as follows: The taxpayer wishing to institute the freeze (the “freezer”) will transfer the target asset to a corporation. In return, the freezer receives fixed-value preference shares, which are structured to match the value of the target asset (“freeze shares”). And the corporation issues common shares (“growth shares”) to others, usually the freezer’s children. The freezer thus retains an ownership interest in the frozen asset via his or her freeze shares. In addition, the freeze shares are structured to ensure that their value remains fixed. So, if the asset’s value increases, this increased value will accrue to the holders of the growth shares.

The COVID-19 pandemic actually offers a tax-planning opportunity for business owners who have seen their business’ value plummet and for owners of stock market portfolios. By implementing an estate freeze during this time of depressed valuation, you gain the ability to defer tax on not only the future growth in value but also the recovered value when the business’ value returns to normal.

If the business owner or stock-market-portfolio owner has already done an estate freeze, the owner can still take advantage of depressed markets by means of a re-freeze. The re-freeze is available when the value of the freeze shares exceeds the value of the corporation. The freezer typically repurchases all the growth shares, so that the freezer now owns all shares in the corporation. The freezer then exchanges all the shares for a new class of preference shares with a fixed value that is lower than the original freeze shares. Family members or a family trust can then subscribe for new common shares.

This opportunity won’t be available for long. Still, an estate freeze is a complex tax strategy demanding expert tax-law advice. Speak to our Certified Specialist Canadian tax lawyer today.

Filing Extensions for Terminal Income-Tax Returns and T3 Trust Returns

If the taxpayer dies, the taxpayer’s legal representative must file the deceased taxpayer’s final T1 General Income-Tax Return (also known as the terminal return). The normal deadlines for filing the terminal return are as follows: If the taxpayer died on or before October 31st, the deceased’s tax return for that year is due by the following April 30th (or June 15th if the deceased or the deceased’s widow earned business income). If the taxpayer died on or after November 1st, the deceased’s tax return for that year is due within six months from the date of death.

The deceased taxpayer’s estate must also file a T3 Trust Income-Tax Return within 90 days from the end of its taxation year.

In response to the COVID-19 crisis, the CRA has extended the normal deadlines for filing these returns:

• If the taxpayer died in 2019, the deadline to file the taxpayer’s final T1 General Income-Tax Return is June 1, 2020. Any tax owing for the 2019 tax year is payable on September 1, 2020, after which interest will accrue.
• If the taxpayer died in 2019, and if the deceased or the deceased’s surviving spouse earned business income, the deadline to file the taxpayer’s final T1 General Income-Tax Return is June 15, 2020. Any tax owing for the 2019 tax year is payable on September 1, 2020, after which interest will accrue.
• If the estate’s tax year ended on December 31, 2019, the deadline to file the estate’s 2019 T3 Trust Income-Tax Return is May 1, 2020. Any tax owing for the current tax year is payable on September 1, 2020.
• If the estate’s filing deadline would otherwise have been in April or May 2020, the deadline to file the estate’s current-year T3 Trust Income-Tax Return is June 1, 2020. Any tax owing for the current tax year is payable on September 1, 2020.

The Canada Revenue Agency hasn’t suspended or extended the deadline to file a notice of objection since those are statutory deadlines set out in the Income Tax Act and cannot be extended by CRA. A Canadian taxpayer may dispute a tax assessment or reassessment by filing a notice of objection. Generally, the deadline to file a notice of objection is within 90 days of the date on the assessment or reassessment. The taxpayer may, however, gain an additional 12 months from the normal deadline by filing an extension-of-time application.

If you’re tasked with administering an estate and need advice about the tax-filing obligations or tax-appeal rights, don’t hesitate to consult one of our expert Canadian tax lawyers.

Probate Applications: Some Unanswered Questions

A probate application is the procedure whereby the applicant asks the court to (1) give the applicant the authority to act as the estate trustee; (2) confirm the authority of the person named as the estate trustee in the deceased’s will; or (3) approve the validity of the deceased’s will.

If the application succeeds, the court will issue a probate certificate, which, if the deceased died intestate, serves as proof that the named person has legal authority to deal with the estate and, if the deceased left a will, serves as proof that the will is valid.

A probate certificate isn’t always required. It is usually needed if, say, the deceased died without a will, the deceased’s will doesn’t name an estate trustee, a bank wants proof of a person’s legal authority to deal with the deceased’s accounts or investments, the estate’s assets include real property that doesn’t pass by right of survivorship (i.e., joint ownership), or a dispute is likely to arise in relation to the estate.

The COVID-19 shutdown will undoubtedly delay the processing of probate applications. For instance, on March 17, 2020, the Ontario Superior Court of Justice suspended all regular operations—including the processing of probate applications—until further notice. While the Superior Court currently still accepts in-person delivery of probate applications, this may change at a moment’s notice. (Of course, applications may be delivered by regular mail, registered mail, or courier. Yet because the probate application must include, if one exists, the original will, the risk of a lost application might discourage many from taking this route.)

Some things aren’t as clear, however.

First, a probate application typically includes several affidavits, which must be commissioned—that is, sworn before and signed by a commissioner for taking affidavits. The April 7^th emergency order regarding witnessing by audio-video conference doesn’t address the commissioning of affidavits. Granted, the Law Society of Ontario says that, for the purposes of the COVID-19 crisis, it will interpret the Commissioners for Taking Affidavits Act as not requiring the commissioning lawyer or paralegal to be in the physical presence of the deponent. But the various Ontario courthouses haven’t yet said whether they’ll accept a probate application that included such an affidavit.

Second, it appears that the Ontario Ministry of Finance hasn’t granted any extensions for filing the Estate Information Return. The Estate Information Return is due within 180 calendar days of the date that the court issued the probate certificate. Although the CRA has extended several deadlines for income-tax and GST/HST purposes, these extensions don’t apply for probate-tax purposes. Ontario’s Ministry of Finance administers probate tax (also known as estate-administration tax), and, to date, the Ministry hasn’t said that it would grant extensions for filing the Estate Information Return. So, if a probate certificate was issued to you in the weeks leading up to the COVID-19 shutdown, you must still file the Estate Information Return within 180 calendar days of the certificate’s issuance.

If you need to administer an estate and want advice on whether probate is required, schedule a consultation with one of our skillful Canadian tax and estate lawyers. If you require a probate certificate, we can prepare and file the probate application on your behalf.